Why Do The Rich Get Richer and What Can You Do About It?
The classification of the rich varies from one country to another. But there is one thing in common with all of them. They get richer as the days go by. The rich get richer because they can afford to take risks with cheaper and easy loans. Getting loans as a rich person is a completely different experience than as a normal saver. The answer to “What can you do about it?” is: if you cannot beat them, join them. People ask “How do I join them?” The first and most important step to joining the rich’s money behavior is to stop saving!
Historically, the metals like Gold and Silver have always kept up with inflation. A dollar was worth $35 per ounce of Gold. This was the reason why countries all over the world chose the dollar to be the reserve currency of the world. But this all changed when then-President Richard Nixon ended the Gold Standard of the dollar in 1971. I won’t give a generic answer in this article such as “buy gold and silver” or anything like that. This article is mostly concentrated on the risky market participants and safe market participants. Let me explain.
What Is Money?
Money is not just the numbers, it is what you eat, what you look like, and where you live! It is everything you drive and study, and everything you purchase and sell. The fun fact about money today is that it is everywhere. There is a lot of money in every economy of the world. But the money of every economy does not have the same purchasing power. Nevertheless, there is no economy in the world with a fixed supply of money.
The pie of money gets larger and larger but it’s not divided equally and rightfully so. But how did we get here? Why do some people have all the money in the world and why do some people have little to nothing? I would be lying if I say it’s because of the lack of financial literacy. It is true in its own ways but the unpretentious answer is: that money today is cheaper than ever to get our hands on.
We do not necessarily have a lot of money. I say this because a huge portion of what we call money is basically someone else’s debt. While larger institutions and investors borrow from each other at a low-interest rate, most people save their money. The savers are providing the borrowers with the liquidity they need and it is the savers who get screwed over.
Why Do Some People Borrow Excessively While Some People Save Excessively?
Now, it’s safe to say the world economy is fueled by a ticking timebomb wired up by excessive borrowing. It can go “boom” at any time. I added the word “boom” here as a reference to NEPSE investors saying “boom boom” whenever the market goes green. The boom is leveraged money from the market participants who do not want to risk their money at all, i.e. the money of the retail savers. In this process, the rich get richer while savers lose Billions every year to inflation.
A savings account is the surest way to destroy your purchasing power. People who only put their money in a savings account stay away from high-risk investments. I will be honest, a savings account is good when the interest rates are high like that of today. But when a situation like that of the pandemic repeats, interest rates provided by the banks are cut to zero. This is where the problem begins.
Fear of Losing Money in Investments
People from professions outside of the world of the stock market have no idea what to do with their money. It’s not that they do not hear about their neighbors and other people getting richer when the stock market is bullish. But the story that sticks with such people is how some people went from riches to rags in the stock market. What they do not realize is these people who went from riches to rags can once again go up from rags to riches.
This fear of losing money makes them see the savings account as their best option. While the people who already have big sums of money take advantage of the liquidity provided by the savers. Some people say “it’s the fractional reserve system that’s providing all this liquidity.” However, they should realize that the primary source of the “fractional reserve system” is the retail savers. The people who have a big risk tolerance to beat inflation to protect their purchasing power are rewarded by today’s economies around the world.
Is the Low-Interest Rate Economy With Cheap Money Sustainable?
No, an economy with a low-interest rate with cheap money is not sustainable. When inflation is not hyperinflated, we do not necessarily experience the pain brought upon retail savers because of a low-interest rate. The popular countries with hyperinflation and cheap money are Venezuela, and Argentina, and the recently popular country is Sri Lanka. While savers in these countries face extreme pain, on the other hand, the people who know that their money is cheap to borrow excessively do so to invest in Real Estate and the Stock Markets.
Funnily enough, the stock market falls during a high-interest rate and high inflation. But the stock market rises during a high-interest rate and hyperinflation. We have a recent example of Sri Lanka’s central bank devaluing their money to the dollar by up to 15%. The savers are in 15% loss, just like that. While people who understand the market see the high-interest rate also see that their central bank has devalued their purchasing power against the dollar by 15%. So, even the high-interest rate is not that expensive to borrow money for these people.
Nepal Rastra Bank buys government treasury to provide liquidity in the market. Otherwise, the Nepalese economy completely collapses. This results in Billions of Rupees circulating in the market. This money goes into the stock market and real estate. If we really compare the land value of Durbarmarg, the worth of Narayanhiti Palace is larger than the worth of Buckingham Palace. This excess supply of money scoops all the money to the people who are already rich. Such a situation increases the gap between the rich and the poor.
What Can We Do About It?
As I have mentioned in the introductory paragraph, if you cannot beat them, join them. Some people say, “I don’t have a high income to invest in the market.” A fun fact: you don’t need a high-income level to create wealth from the market. Instead of saving Rs. 15,000 (roughly $100) a month, put that money in the stock market regardless of the market performance. If you invest $100 a month for 40 years from the time you turn 20, your net worth will be $637,778 when you turn 60 if the market gives a return of 10% per year.
Some people ask, “why not put your money in a fixed deposit at 11% if you’re expecting a 10% return from the stock market?” It is a valid question. But similar to the market not always rising, interest rates also do not always rise. When the base rate is low, even the fixed deposit is priced at an interest rate below the inflation rate of the economy. Instead of providing liquidity to big players by saving, why not stay invested in the market so you can take advantage of the big players speculating in the market? You won’t even have to take excessive leverage as they do.
Stop Saving, Start Investing
Now, another question arises. “What if I do not know anything about investments in risky assets such as stocks and real estate?” To this question, I will NOT answer “buy Gold and Silver.” My answer is: you really have no other choice! If a Janitor in the USA with no school education can build a wealth of $8 Million before he passed away, you really do not have an excuse. But how did he do it? Diversification!
It’s a very bad decision to concentrate your money on an individual stock if you have no idea what you are doing. We know what Warren Buffett says about diversification: “diversification is a protection against ignorance.” The janitor I mentioned above-owned shares of at least 95 companies. If one company fails, other companies cover up the losses. Diversify and invest for the long term. It’s always better to stay invested in the market than to have your money in a savings account.
Don’t Blame the System, Join the System
Why am I writing all this? Do I think there is an inequality in the distribution of wealth? If you’re expecting a woke response, you’re not getting it here. Yes, there is an inequality in the distribution of wealth. This is because the central banks across the world increase the money supply for their economies while people save up. Here, the money supply of the respective economy grows but the money supply in your savings account stays the same. The foundation of wealth inequality begins here and here only.
What do I do now? Do I blame the system and cut ties with friends and family members who don’t play the victim of the system card? No, absolutely not. I learned how to join the system. This is exactly what you should do as well. When they increase the money supply, you will have to keep up with it. Else, you will fall behind. The days of a high-interest rates environment favoring the savers are over! Now, even if the interest rates rise, they cannot reach too high cause if that happens, an economy can collapse due to the lack of money in the economy.
Honorable Mentions From Twitter:
Replies on my twitter
- The easiest way to come out of the poverty trap is to study well and work hard. Education has higher odds of fulfilling your needs and unlocking many opportunities in life. If anyone has the experience and expertise in any specialized field that’s the greatest asset. The only downside of education is it can’t be transferred to generations like other assets. Like, For my children have to start from scratch. In rich people, we see they are mostly handling the family business from where their parents left off. This causes a huge headstart for them.
- I think the problem is caused by these parameters: The income inequality problem, Capital investments, Policy on taxation, Opportunity, and Education What can be done to resolve this problem? A focus on education and training, A regulatory framework, Programs for the poor.
- Give some insights about wealth realtionship with time.
- I think the primary thing that makes difference is probably education. Understanding the market needs, trends, and future possibilities could be things to know and work on.
- The most important distinguishing factor is circle and it’s influence.
- Rich people invest in assets not in liabilities.
- I think we are not taught about finance and we don’t have any knowledge about liabilities and assets. We are spending more money on liabilities and increasing our expenses rather than investing in assets which can give passive income on future.
- Poor and miiddle class people looking for instant gratification.
- Rich: discuss trading, stock market, ROI, crypto, and business on casual family/friends meetings… they work while poor: talk about expensive cars and bikes, football matches, betting, popular celebrity, insta etc… They try to look rich.
Thank you. Please comment down below if you have other opinions. Also, read “Has NEPSE Bottomed Out Yet?“